Profit Centre: Why we invest in sustainability

I receive a phone call nearly every week from someone asking me how the Toronto Atmospheric Fund got into and does “impact investing.”  By impact investing, we’re referring to how we invest TAF’s $23 million endowment in a manner that aligns with our mandate: advancing local solutions to climate change and air pollution.

Today, all sorts of organizations are taking another look at their portfolios and considering how they could do some good for the planet through their investments while still earning a respectable return.  While responsible investing isn’t a new idea, it is getting more attention and more capital, although the amount invested overall remains a small percentage of the global investment effort.  That’s okay – movements always start small. But movements can also build rapidly, especially when voices as diverse as the Intergovernmental Panel on Climate Change, university-based fossil fuel divestment campaigns, huge pension funds and Apple are all touting the need for, and value proposition of, the low-carbon economy.

We were an impact investor from the get-go.  Our first impact investment was a $15 million loan to the City of Toronto to retrofit the city’s street and laneway lights.  Doing so cut the City’s lighting energy and bill in half – more than $30 million has been saved to date – reduced GHG emissions by 95,000 tonnes, and provided TAF with a return on investment.

Up to 60% of our endowment is available for direct investing and we take a very strategic approach. All our investments must yield a market rate of return – which pays for TAF’s operations as we receive no funding from the City – and GHG emissions reduction.  We also aim to demonstrate innovative financing strategies in the low-carbon space.

Over time, we’ve expanded the proportion of our endowment which can be directed to impact investments.  We realized that accounting for environmental, sustainability and governance factors has the potential to improve returns, and that ignoring carbon risk could impair returns over the long term.

A few weeks ago I attended a conference hosted by Generation Investment Management – cheekily known as the Blood & Gore fund – one of the firms that TAF hired in 2012 to invest our equities.  Their approach is to invest in activities that are sustainable and they have consistently shown that a combination of clear criteria and solid research can produce an excellent portfolio.  The room was packed with major investors, and none of us – big or small – were willing to compromise on either sustainability or performance.   We also hired Greenchip Capital, a Toronto-based firm, which has a similarly robust thesis and strategy – pick the right companies for the right (sustainability) reasons.

Innovation is in our DNA at TAF and that includes how we invest our endowment.  We intend to mobilize much more capital into urban low-carbon solutions. It’s great to see that this market growing – good for us, good for the planet!